Why Employment Is a Strategic Function: the Business Impacts of a Bad Hiring Decision

Dr. John Sullivan

Strategic functions are those that (1) impact across all departments, (2) affect product development and customer satisfaction, and (3) significantly impact profitability. If your company has a turnover of 20% per year and all of your new hires are mediocre, it will only take 5 years for all of your entire workforce to be mediocre. The cost of a "bad hire" for a software engineer can exceed a million dollars, for a CEO it could be as much as $1.4 billion (Ask Quaker Oats for example!).

Assumptions About Recruiting

If you don't recruit and select great people, you won't have great employees. And without great employees you won't have a great company.
Great ideas and products come from people not from equipment, buildings or capital.
No one purposely hires mediocre applicants but weak recruitment efforts and less than stellar selection tools will result in the hiring of mediocre employees. Everyone hires some mediocre employees but poor employment systems will result in a higher proportion of "turkey" hires then in world class ones.

The Business Impacts of Hiring Mediocre People

When you hire mediocre people one or more of the following things may happen :

Increased Management Time and Effort

Mediocre employees require "high maintenance" and more management attention and worry
Time spent on "problem" employees can't be spent on the best employees
Mediocre hires for management and team leader positions have a multiplier effect on the productivity of others

Training Time and Costs

Mediocre employees, because they lack competencies, must attend more remedial training
The time mediocre employees spend in training slows their "time to productivity"

Customer Satisfaction and Error Rates

Mediocre employees send a message to our customers that we are getting weak or that we don't care about them
Errors by mediocre employees lose us sales volume and occasionally customers

Product Development

Mediocre employees have fewer ideas and mediocre ideas that distract us from where we really need to be going
Time To Market is dramatically impacted by the disruption caused by their mediocre ideas and questions and because they do not fit well into in a team of "winners"
Trying to humor them or not hurt their feelings when they don't understand what the rest of the team is trying to do wastes time and energy. We answer their questions and politely try to help them come up to speed, when this help wouldn't be necessary if they "got it".

Our Competitive Advantage

When we hire a mediocre employee that is one bad hire that our competitor can not now hire by "mistake"
A mediocre employee takes up a spot on the team that can't be taken by a superstar. These are called opportunity costs
Mediocre employees send a message to our competitors we are getting weak. This might encourage them and improve their own confidence/image so that they become bolder in the product market
Mediocre employees produce less per dollar of cost (salary). Since typically 60% of all corporate budgets go to employee expenses that makes the inefficient use of these funds a major corporate weakness.
Hiring mediocre CEO's and top managers can adversely impact our stock price and the willingness of others to partner/merge with (or invest in) us

Other Employee's Productivity

Superstar employees often resent being on the same team with "losers"
Team productivity can suffer due to lost time helping the weaker bad hires

Our Image and PR

Mediocre employees send a message to our competitors we are getting weak
Mediocre employees send a message to future recruits that we are not a selective employer
Mediocre employees send a message to our current employees we are headed down hill
High turnover rates due to mediocre hires sends a message to other recruiters and potential applicants

Fill in Time

Mediocre employees may have increased absenteeism and tardiness
When mediocre employees are in extra training someone must fill in for them
During the "gap" between the termination of the bad employee and the hiring of a new one there must be fill in help

Out of Pocket Costs

Ad costs for recruitment as a result of having to do a replacement hire.
Bad hires often cost the same in salary and benefits as great employees but their Return on Investment is much below that of a great employee. (For an excellent hire the revenue generated by a new hire exceed their salary by at least 5 times)

HR Time and Image

Increased termination, exit interview and firing costs as a result of mediocre hires
Increased disciplinary costs as a result of mediocre hires
Added recruitment time and interview time as a result of having to replace a mediocre hire
More paperwork, files and documentation as a result of having to replace a mediocre hire
Poor HR work is seldom more visible than when we complete a mediocre hire. It loses the trust we have built up and the bad image often "spreads" beyond employment to the rest of HR

What We Need to Do (and be Able to Prove it) is Hire People:

With more competencies (that we need)
Who self-develop without the need for company training
Who have more ideas that are implemented
That have a lower error rate, number of discipline incidents and absenteeism rates
That have a higher customer satisfaction, higher performance appraisal scores, bonus rates and promotion rates
That require "low maintenance" from managers
That stay longer before quitting
Who produce more return for every dollar of salary paid them

It's that simple. Mediocre employees cost us a bundle and great ones make us rich!

Dr. John Sullivan is a Professor and the HR Program Coordinator for the College of Business at San Francisco State University. He is also a frequent author, speaker and management consultant. He may be reached by e-mail at johns@sfu.edu.